I found a couple of opinions about this hadith and how it should be understood!
- From this salafi Fatwa (Arabic) one could conclude that this hadith must be applied and it's not allowed to have churches or any kind of place of worship of non-Believers on the Arabic Peninsula (= Saudi Arabia, Gulf-states and Yemen) and if some of that was built it should be destroyed. And Muslims there shouldn't employ non-Muslims unless it's necessary according to shari'a rules!
Some ahadith which have mentioned that and are the basis of this fatwa (and other fatawa/fatwas and interpretations which i may quote later) are in sahih Muslim, sahih al-Bukhari, Muwatta' Malik and there are other narrations in sunan abi Dawod and Musnad al Imam Ahmad.
- An other salafi scholar tried to explain what was understood about the Arabic Peninsula so he pointed at the definition in the hadith from sahih al-Bukhari "It comprises Mecca, Medina, Al-Yama-ma and Yemen", an other from sunan Abi Dawod.
Then he explained that according to the shafi-i scholar al-'imrany non-Muslims could enter this area to work or for trading with the accordance of the Imam (Authority), but they shouldn't stay longer then three days at one place in al-hijaz (especially).
Imam an-Nawawi added in his sharh/explanation of sahih Muslim that this applies for the hijaz in first place as the Messenger of Allah (peace be upon him) only expelled them from hijaz! And he added that Imam Malik and ash-Shahfi'i considered the whole Peninsula as described in the hadith from sahih al-Bukhari, and they declared that non-Muslims shouldn't reside (i think it's more likely to be understood with the option of possessing land or real estates) with the slightly difference that Imam ash-Shafi'i focussed on Mekka, al-Madina and al-Yamama (excluding Yemen).
Imam abu Hanifa allowed non-Muslims to enter the whole Peninsula excluding the haram in Mekka! Imam ash-Shafi'i said they shouldn't enter the haram unless they have an accordance of the Imam (Authority) and the entrance would be beneficial for Muslims!
Some scholars allowed the entrance (for work, trading etc.) of non-Muslims with the accordance of Muslims living in the Peninsula.
So apparently non-Muslims are allowed to enter the Peninusla and work there as far as they have an accordance from authorities (in best case) or a kind of contract they only shouldn't stay at one place in the so called hijaz area for more then 3 days! They shouldn't posses real estates and shouldn't build any place of worship there!
which includes the hijaz: Mekka, Medina, al-Yamamah and what is next to it. Because there's a consensus on excluding Yemen from this definition!
This Hadith seems to be Sahih and it should be applied, but it doesn't mean that non-Muslims don't have the right to enter Arabic Peninsula, but it doesn't allow what we call today "freedom of belief" and having estates there. So they are free to come for work and business as long as this would be temporary.
Note that the Arabic Peninsula form the Hadith differs a lot from what we call it now!
And Allah knows best!